Nuclear Industry: Review

3.58 p.m.

The Minister of State, Department of Trade and Industry (Earl Ferrers): My Lords, it may be for the convenience of your Lordships if I repeat a Statement which has been made by my right honourable friend the President of the Board of Trade in another place. The Statement is as follows:

"Madam Speaker, with permission I would like to make a Statement about the conclusions of the Government's nuclear review. This will be followed in due course by a debate. The findings of the review are set out more fully in a White Paper which I and my right honourable friend the Secretary of State for Scotland are publishing today and placing in the Libraries of both Houses and the Vote Office.

"First let me say that safety has been a paramount consideration throughout the review. The review has confirmed that nuclear power plays an important role in meeting the UK's energy needs and should continue to do so, provided that it is competitive and is able to maintain rigorous standards of safety and environmental protection. The nuclear industry argued the case for additional nuclear power stations. The appropriate test of this case is the potential availability of private sector finance for a project to build a new nuclear power station. There is, at present, no case for government intervention to distort the electricity market by providing finance or guarantees to one form of generation over another. While the market will ultimately be the judge, the review concluded that, on the basis of the figures provided by the industry in the review and in the light of the returns available from alternative generation projects, private finance is unlikely to be available at present for new nuclear construction.

"The review also examined whether, and over what time-scale, privatisation of the nuclear generators would be feasible. The benefit to consumers from the privatisation of most of the electricity supply industry has been clear: domestic electricity prices are now lower in real terms, even after VAT, than two years ago, with further reductions in the pipeline. The average

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price paid by industrial consumers has fallen by more than 10 per cent. in real terms since 1989, the last year in which the industry was in state ownership.

"The nuclear stations had to be excluded from electricity privatisation then, because investors were concerned about the risks of substantially increased nuclear costs; about the performance of the advanced gas cooled reactor, or AGR stations; and about the costs of financing new pressurised water reactors, or PWRs.

"The situation today is very different. The generators have removed many of the uncertainties about the costs of managing spent fuel and waste and decommissioning plant. They have completed the first stage of decommissioning Berkley Magnox station and the costs have been about one-third lower than originally estimated. The performance of some AGRs has vastly improved. Sizewell 'B' has been built within budget and is now in operation.

"As a result, the Government have decided to privatise the more modern nuclear stationsthe seven AGR stations and the PWR station at Sizewellduring the course of 1996. The liabilities associated with those stations will also be transferred to the private sector.

"The Government have decided to create a holding company, with the parts of Nuclear Electric and Scottish Nuclear which are to be privatised as its wholly-owned subsidiaries. The holding company approach has been designed both to preserve the identities of Scottish Nuclear and Nuclear Electric and to establish a significant holding company to be registered in Scotland, where its headquarters will be located. The headquarters will include all key group functions. A chairman independent of both Nuclear Electric and Scottish Nuclear will be appointed.

"Scottish Nuclear will continue as a separate entity with its own board; its continued existence will be protected by special shares in the holding company and in Scottish Nuclear Limited. The functions currently carried out by Scottish Nuclear at its headquarters in East Kilbride will continue to be carried out there. In addition, it is expected that engineering functions within the group will be reorganised to bring more jobs to Scotland. In all, those developments are expected to bring at least 100 jobs to Scotland.

"The new subsidiary companies will continue to participate in their respective markets in England and Wales and Scotland. There will be no change in the market share held by Scottish Nuclear in Scotland but the establishment of the new separate Magnox company in England and Wales will mean that Nuclear Electric's private sector successor will have a smaller market share than Nuclear Electric does at present.

"In private ownership, the holding company will be free to compete, both domestically and overseas. Privatisation will provide powerful incentives for the two subsidiary companies to benefit their customers by raising efficiency and reducing costs.

"The new company will be totally committed to maintaining the exemplary safety record of the nuclear power generating industry. Safety is of paramount

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importance, and will not be compromised. As the Health and Safety Commission said about the transition to the private sector in its evidence to the review:

'The system of nuclear regulation in the UK ... is internationally recognised as a rigorous system for ensuring a high level of safety. It is essentially sound, and there is no reason to change it in any fundamental way to deal with whatever structure emerges'.

I agree. The Government's commitment to the continuation of a rigorous safety regime remains absolute.

"The Government intend to safeguard financing of long-term liabilities to be passed to the private sector as a result of those proposals through the creation of segregated funds or similar arrangements.

"The review also considered the future of the Magnox stations. The Government do not believe that the Magnox stations can be privatised. The review did identify, however, opportunities for reducing the costs of discharging their liabilities, which potentially fall to the taxpayer.

"The Government propose in the first instance that all the Magnox stations and their liabilities should be held in a stand-alone company owned by the Government. That will create a new baseload nuclear generator with 8 per cent. of the English and Welsh market. In due course, that company will be transferred to BNFL, giving BNFL a clear incentive to maximise the revenues from Magnox generation, to minimise reprocessing and other backend costs, and to optimise the economic life of the stations.

"Finally, the review examined the fossil fuel levy in England and Wales and the Nuclear Energy Agreement in Scotland. Both Nuclear Electric and Scottish Nuclear have achieved significant improvements in their financial performance and in defining and reducing their liabilities. In the case of Nuclear Electric, the company and its public and private sector successors should now be able to meet the full costs of liabilities as they fall due without further help from the fossil fuel levy.

"The Government have therefore decided that, at the time of privatisation, that part of the fossil fuel levy to which Nuclear Electric is entitled should be abolished, at least 18 months earlier than previously expected. Electricity prices in England and Wales will fall by up to 8 per cent. in a full year as a result of that decision, with the average annual household electricity bill falling by as much as £20. Lower prices will also give a major boost to the competitiveness of British industry.

"Comparable arrangements will be put in hand in Scotland. The nuclear premium there will be ended, and those savings will be passed through to franchise customers in Scotland. Due to those and other savings already in train, domestic electricity prices in Scotland will fall by around 8 per cent. in real terms between 1994 and 1996.

"My right honourable friend the Secretary of State for the Environment is making an announcement today about issues relevant to the nuclear review, which have been examined in his parallel review of radioactive waste management policy.

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"Madam Speaker, the proposals that I have announced today will make for a more competitive nuclear generation sector operating to continuing, rigorous safety standards. They will strengthen the ability of British companies to market nuclear services abroad. That is the right way forward for this key industry. At the same time, the changes in the fossil fuel levy and the equivalent step in Scotland will bring significant benefits to consumers. I commend the proposals to the House".

My Lords, that concludes the Statement.

4.7 p.m.

Lord Peston: My Lords, I must first thank the Minister for repeating to the House the Statement made in another place by his right honourable friend. I find myself in an even more difficult position than is normally the case when dealing with Statements. This is an immensely interesting subject, but one which is technically difficult. I shall make my usual complaint: it is absurd that one is supposed to get up and begin to discuss such matters off the cuff. The position is made even more absurd by what appears to be, at a glance, a remarkably interesting White Paper. I must apologise to your Lordships and admit that I have just flicked through the pages, so there is no possibility that I can comment upon its contents.

The second sentence in the Statement reads:

"This will be followed in due course by a debate".

We always have to understand that as meaning that the Statement will be followed by a debate in another place; it is never followed by a debate in your Lordships' House. One of the most ridiculous things about the arrangements in your Lordships' House is that we have debates on all sorts of subjects but because, obviously, the Opposition do not choose to use their very scarce time for such matters the Government never choose to find time to debate such fundamental issues. I can only repeat what I have said many times. I do not believe that that is making full use of all the skills and strengths of this House. The thought that today is the only time we shall have this remarkable White Paper before us does not fill me with any pleasure. Noble Lords have heard me say that before; that will not stop me saying it today or, indeed, in the future.

I have a number of questions to ask and a number of comments to make. First, am I right that the proposals contained in the Statement will not require legislation? I am not entirely certain of that, but I think it is the case that, because of previous legislation, this will simply happen. Incidentally, if that is trueI would like confirmationit underlines my point about debates. It means that we shall not even debate the matter as legislation. We should be told whether I am right that legislation is not required.

I now discuss the detail. The Statement says that the Government feel, to use their wordI think it is the wrong word herethat there is,

"no case for government intervention to distort the electricity market by providing finance or guarantees to one form of generation over another".

I object to the word "distort". Until this point the Government have taken a viewnot one I necessarily disagreed withthat a balanced energy programme was

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a sensible one, and that that kind of diversity might well require government support for one kind of generation rather than another. I would not use the word "distortion" as regards achieving that end; rather, the words "rational economic calculation".

Essentially the Government are saying that they no longer feel any further diversification is required. As the Government feel that way, and the Statement says that,

"private finance is unlikely to be available at present for new nuclear construction",

am I right to infer, putting the two together, that that means the end of nuclear construction? Am I right to infer that the stations we have are the ones we shall have and that there will be no more? The Government will not put up any money and the document states that the private sector will not do so either. Although I am quite interested in science fiction, I cannot believe that our friends from Mars will come down and finance a nuclear station. I shall not comment on whether that serious matter is right or wrong, but it represents an important moment in the history of nuclear power.

I now deal with the question of decommissioning, liabilities, and all that. My noble friend Lord Williams of Elvel was, I believe, dealing with the matter when it was previously discussed. I believed then that the matter was simple and straightforward, that the private sector was simply not willing to bear the risk of decommissioning, and that that was why it did not happen. That appeared to come as a surprise to the Government. I remember the very hour it happened. However, it appears now that something has changed, if only slightly. The Magnox stations will stay nationalised. That has always struck me as being the reverse of what one might call traditional Adam Smith doctrine. Adam Smith essentially enunciated that the government were the place for safe projects and that the private sector was the great risk bearer. However, when it is a matter of nuclear generation it appears that the private sector will not go within a million miles of any risk taking and therefore the risks of not knowing the costs of decommissioning must be borne by the public sector.

My main question is the following. Does the review show that now we can calculate the costs of decommissioning the non-Magnox stations pretty accurately? Is that what has now been demonstrated? That leads me to another question. The Statement says:

"The liabilities associated with these stations will also be transferred to the private sector".

When I refer to stations, I refer to the AGRs and the PWR. The Statement continues:

"The Government intends to safeguard financing of long term liabilities to be passed to the private sector as a result of these proposals through the creation of segregated funds or similar arrangements".

That seems to me to be gobbledegook for saying that the private sector must put in train an amortisation fund which will amount in due course to the costs of decommissioning the AGRs etc. Am I right that that is what it means? That takes me to a related question. Does it therefore mean that this calculation can now be done; namely, that someone can say that the cost of decommissioning an AGR station can now be correctly

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calculatedgiven long-term rates of interest expected to last over the next 50 years of perhaps 8 per cent. net and 5 per cent. realand that we now know how to set up the relevant fund? Is that what this is meant to say?

Can the proposal in the Statement on segregated funds be carried out without legislation? Does the Companies Act ensure that the new privatised sector will be obliged to create sufficient funds? It is not obvious to me that that will be so. It is worth bearing in mind that this is a special kind of risk because if, in due course, a privatised nuclear power company has not set aside enough funds for decommissioning, and decommissioning is required, there is not the slightest possibility that the Government could then say, "Well, too bad, that is your problem". The Government would have to take on that risk if the privatised companies had not set aside sufficient funds. Two things follow. The obvious point is that they must be legally made to do that in the first place. It seems to me absurd to place this matter in the private sector. If one ever set up a classic economic argument for why something ought to be in the public sector, the risk and decommissioning costs here exemplify that well. However, that does not stop the Government.

My next question and/or comment concerns the bizarre state of affairs in Scotland. I am delighted that we can calculate with such accuracy that the number of jobs created will be 100. With an unemployment rate of 2.5 million, I am delighted that we can calculate to a fineness of 100. However, that is by the way. And 100 is better than 50, which was the alternative calculation offered to me. However, I cannot see why the holding company is being set up, and why, if we are going to privatise, the two companies are not being privatised separately. I just cannot understand the logic of that argument. The regulator seems to have taken a different view and several other economic commentators have also taken a different view. What one ought to have done was to concentrate on competition here rather than on anything else.

As I have not had the chance to read the White Paper, I have to ask the Minister whether it demonstrates that the holding companyputting the two companies togetheris the correct answer. Is there research that shows that? And is that research set out in the White Paper? It certainly puzzles me that that is so. I have another question. I take it that the new body, given that it will not build any new nuclear stations and given that its capacity is then fixed, will be allowed to go into other methods of generation. Will the Minister confirm that there is nothing to stop the new body going into other methods of generation, especially if and when the Gas Bill goes through your Lordships' House and becomes law?

I hope that noble Lords will forgive me as I am speaking for longer than I would wish. That emphasises how important this subject is. I am not clear from the Statement what the role of the special shares in the Scottish company is. Is the role to prevent it being "de-Scotticized"I am inventing the wordin order to please the Scots and to ensure that there will be a Scottish element? Are the shares intended as a pledge to the Scots that they will always have one bit of the English company, and that one bit of the English company will be forever Scottish? Is that the point of the shares? Perhaps the Minister can tell me. Will he also say how that can

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possibly be a guarantee because, so far as I know, the Secretary of State could have such shares but could sell them at any time he or she fancied selling them? Therefore, one cannot give the Scots that kind of guarantee by means of the shares. Nevertheless I ask that question because I want to know the answer.

Happily, I have nearly reached the end of my remarks as 10 minutes is long enough to speak. I have some final comments. The Minister said that the nuclear levy is coming to an end. Does he agree that ending the fossil fuel levy has absolutely nothing to do with the privatisation proposals? One can end the fossil fuel levy at any time one chooses. It is useful to refer to the two matters in the same Statement but they have nothing to do with each other as regards privatisation. Can we also be told what the effects of the abolition of the nuclear fossil fuel levy will be? Has there been any forecast or analysis of the effect on renewable energy?

My last comment concerns safety. I am not anti-nuclear. I have always favoured an energy market which was both diverse and efficient. It does British industry no good to have inefficient energy production. If nuclear energy is efficient, then I am in favour of nuclear energy. If it is inefficient, I am against it. That goes for any other form of energy supply. However, I accept the diversification argument. There is no difference between the Government and us. However, safety is central. We have to bear in mind that the general public are particularly sensitive to safety in this area and do not like smart alecs telling them not to worry. I speak as a smart alec.

My concern is whether, once the industry is privatised, the role of the inspectoratewhich, as the Statement says, is recognised worldwide as outstandingly goodwill be fully safeguarded. Does the sentence,

"The Government's commitment to the continuation of a rigorous safety regime remains absolute"

mean that, in so far as they are able to give a guarantee, the Government guarantee the position of the inspectorate and will support its continued existence?